CA, USA, 30 July 2024-The IRS has provided new guidance for exceptions to the 10% additional tax on early distributions from retirement plans. They address situations involving emergency expenses and survivors of domestic abuse. These exceptions are part of the SECURE 2.0 Act of 2022, effective from January 1, 2024. Optima Tax Relief reviews how these exceptions allow individuals to access their retirement savings without penalty under specific circumstances.
Background
The SECURE 2.0 Act of 2022 is legislation aimed at enhancing retirement savings for Americans. Building on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, it introduces several reforms to improve retirement plan access, increase savings, and simplify retirement plan administration. Key features include automatic enrollment, increased catch-up contributions, expanded RMD ages, emergency savings accounts, student loan matching, and part-time worker retirement plan eligibility. The SECURE 2.0 Act introduces two main exceptions to the 10% additional tax on early distributions from retirement plans: emergency personal expense distributions and distributions to victims of domestic abuse.
Emergency Personal Expense Distributions
Under the new guidance, individuals can take distributions from their retirement plans for emergency personal or family expenses without incurring the 10% additional tax. The IRS has defined “emergency personal or family expenses” as unforeseen or immediate financial needs related to personal or family emergencies.” These may include situations such as sudden medical expenses, urgent home repairs, or other critical financial obligations.
To qualify for this exception, the individual must demonstrate that the distribution is necessary to meet an immediate and heavy financial need. They may not take more than one withdrawal per calendar year as an emergency personal expense distribution. They may not withdraw more than $1,000 per calendar year. Finally, the individual cannot take any other emergency personal expense distributions during the following three calendar years, unless certain requirements are met.
Distributions for Domestic Abuse Victims
The second exception applies to survivors of domestic abuse, allowing them to access their retirement savings without penalty. The IRS recognizes that domestic abuse survivors often face unique financial challenges and may need to access their retirement funds to secure safety, shelter, or other essential needs.
To qualify for this exception, individuals must provide evidence of domestic abuse, such as police reports, court orders, or statements from a medical professional or domestic violence organization. The victim of domestic abuse can receive a distribution penalty-free if made during the one-year period following the abuse. SECURE 2.0 allows victims to receive a distribution of up to $10,000 without penalty. This amount will receive a cost-of-living adjustment each year.
Taxation and Repayment
While the distributions are exempt from the 10% additional tax, they are still subject to regular income tax. Individuals who take advantage of these exceptions should be aware of the potential tax implications and plan accordingly. Additionally, the SECURE 2.0 Act allows individuals to repay the distributions to certain retirement plans within three years of the distribution date. Repayments can help individuals restore their retirement savings and reduce the long-term impact of the early distribution on their retirement goals.
Conclusion
The IRS’s new guidance on exceptions to the 10% additional tax on early retirement plan distributions marks a significant step toward providing financial relief to individuals facing emergency personal or family expenses and survivors of domestic abuse. These provisions under the SECURE 2.0 Act of 2022 are designed to offer a safety net for those in need, allowing them to access their retirement savings without incurring penalties in times of crisis.
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